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Iowa's high rates diminish employee productivity

March 15, 2011

A study by three Iowa State University economists says that Iowa's high marginal tax rates are a productivity killer:

The economists found that because of the taxes, businesses have less money to spend on capital investments that are critical to attracting the most skilled labor prospects, who then opt to go elsewhere for employment. And because of that compounding effect, the study reports that Iowa's tax structure ranks 48th and last in the continental United States in terms of adverse effects of its taxes on labor productivity.

Iowa's highest-in-the-nation corporation tax comes under fire from Peter Orazem, one of the study's authors:

"The state of Iowa has the highest marginal corporate tax rate at 12 percent, with the next highest state's rate being 9 percent," he said. "The corporate rate raises very little revenue and damages labor productivity. They raise relatively little revenue because firms will want to earn their profits elsewhere because the rate is so high."

He targets Iowa's loophole-ridden system:

"And everyone who doesn't get one of the special deals is paying a higher rate to pay for all those who do. In my mind, the mistake the state is making is that rather than simply reducing the corporate tax rate, we should be broadening the tax base by eliminating all these special deals while lowering the marginal tax rates for everyone."

You know, that prescription sounds a lot like the Tax Update's Quick and Dirty Iowa Tax Reform.

This is a welcome counterpoint to pundits and think tanks who like to say that Iowa's high corporation tax isn't a problem because it doesn't raise much money. That's not a defense of the system, as far as I'm concerned; it's a further indictment of it.

Link: Text of Study

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